Driving growth through digital innovation

Every company leader knows that to succeed, innovation must be at the core of their business. But reimagining the way products and services are made—at scale—is easier said than done.

Take a global sportswear manufacturer: with ever-growing demand for hyper-personalization, executives were facing a major challenge—how to create customized sneakers that were both comfortable and durable, with fast turnarounds on a global scale. To meet the challenge, the company opened a manufacturing facility that relied on automation through robotics, machine learning and 3D printing.

But implementing emerging technologies wasn’t enough. The fully automated production line couldn’t ramp up fast enough. The manufacturing facility couldn’t adapt operations to support its automation system. With financial losses that befuddled shareholders, production was terminated three years into the project. An otherwise successful brand couldn’t scale design and innovation profitably.

The truth is, they’re not alone.

Today, large industrial companies need to deploy digital technologies for wide-ranging aims. To stand out among competitors, they must apply innovation not only to existing and new operations but also to the products and services they develop.

But only a select few industrial companies manage to get the return they expect on digital investments.

To find out why, we zeroed in on a critical transitional phase for large, innovative organizations: when and how they move from a successful digital proof of concept (PoC ) to scaling that pilot for growth and profit.

Scaling winners, scaling losers

Our survey of 1,350 global senior executives in key industrial sectors found that few companies win, most struggle and some completely fail, especially as they attempt to shift from improving the efficiency of their operations to generating new value for customers.

Between 2016 and 2018, the industrial companies in our survey spent a little over $100 billion on scaling digital innovations to drive new experiences and efficiencies. Yet 78 percent of industrial companies didn’t reach expected earnings.

Only 22 percent of industrial companies we looked at achieved a return on their digital investments (RODI) that exceeded their expectations. This small group of industrial companies, which we call “Champions,” are nailing digital transformation and rising above the rest.

Our findings show that these companies approach the organizational challenges associated with innovation very differently to their peers. They are more strategic, identifying the value they want to achieve and recognizing how their innovation efforts will affect their organization. For high-performing Champions, it’s not about scaling more pilots (even though they do). It’s about earning more by scaling better.

Eyes on the prize: What Champions stand to gain

Champions are achieving greater value than their industry peers and are consistently exceeding higher performance expectations.

Champions expect to achieve RODI—and they earn RODI higher than industry average for returns on overall invested capital (ROIC) and industry RODI. They also scale more than 50 percent of their digital pilots.

The other 78 percent of companies? Up against common challenges, they’re struggling.

The companies trailing Champions—the second group (“Contenders”)—earn RODI lower than industry ROIC and lower than industry RODI despite scaling more than 50 percent of their digital PoCs.

The companies in the third and last group (“Cadets”) earn RODI lower than industry ROIC and lower than industry RODI and scale less than 50 percent of their digital PoCs.

What’s at stake for industrial companies that fall into these three groups? We collected data on 23 different organizational challenges across six categories. With an econometric model, we estimated the correlation between critical levels of the organizational challenges and the RODI.

Our analysis reveals how much incremental value, by percentage, could be achieved by overcoming these challenges, across industries. Then we compared the effect on discrete industries, where companies produce and assemble products made of distinct parts, and process industries that formulate complete offerings.

By overcoming alignment challenges and infrastructure inadequacies, companies can unlock the most value—with a chance of almost doubling their RODI.

The incremental value associated with overcoming challenges of digital skills and partnerships is marginally lower. And there is a measurable value associated with improving organizational culture.

Though Champions and the rest face common challenges, the size of the prize varies. Champions have overcome some of these critical challenges—as evidenced by the high RODI they earn. And yet, they can still unlock an additional 3.5 percent RODI. For others, the value at stake is much higher—almost three times as much—9.9 percent.

Struggling to scale: The four biggest challenges

“Innovation is known to impact much more than the direct bottom line of the product in which it is implemented,” Jorge Guzman, Assistant Professor of Business at Columbia Business School, told us. “Besides net income for a specific product or service, innovative work also changes the capabilities of a company to tackle the future and helps them try new ideas that could be risky, but potentially highly profitable.”

New innovations require companies to reimagine how they work, to digitally transform their operations and to exceed their customers’ ever-evolving needs. Each of these tasks comes with a unique set of challenges.

Executives of discrete producers and process industries repeatedly ranked four issues as the top barriers to scaling proof-of-concept projects:

1. Defining digital value, from the top down

Whether it’s improving the customer experience or innovating a new product, adding digital value can mean different things to different people. But if top leaders disagree on the customer experience they want to deliver, the cascading effect of such conflict can be deeply problematic.

2. Aligning with middle management

Top management needs a vision for how middle management should build, execute and scale pilots and innovate efficiently. If there’s friction among middle managers and between middle and top managers—amid time and budget pressures—the company will fall short of its goals.

3. Syncing talent pools with IT assets

Many mechanized products manufacturers are burdened with legacy IT tools and solutions. Rising digital experts find these cumbersome and ill-suited to designing, developing and scaling digital offerings for the company and customers, while middle and senior managers can’t always leverage new IT and digital technologies.

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As one senior executive puts it, the result is too often putting “digital lipstick” on legacy IT.

"New information systems have always upset business processes, requiring investments in both organizational change and technology," said Nicolas van Zeebroeck, Professor of Innovation & Digital Business, Solvay Brussels School of Economics & Management, Université libre de Bruxelles. Digital technology today not only imposes new work structures but also requires new business models and rapid adjustments to accelerating innovation.

“The new work, delivery and business models require a new mix of skills, culture and governance that will deeply change existing organizations,” he tells us. “Without those complementary investments in organizational change, the technology simply cannot deliver tangible results.”

4. Positioning in-house innovations to win in the digital ecosystem

Finally, manufacturers have to align innovations designed in-house with the agile, digital ecosystems on the outside. Otherwise, mid-level managers and employees—fearing their ability to support the innovation—may wonder if engineers and innovators from the ecosystem will replace them.

“Many large businesses in the EU are going after agility, sometimes obsessively so, to prepare their organizations for an ever more digital future,” van Zeebroeck said. “The first step is often to set up some agile team or digital office that springs new ideas or solutions. But most of them have a very hard time scaling these initiatives internally and externally. In many firms, agility remains an abstract concept that should apply to teams, but it’s not entirely integrated and applied by the top management itself, where it should start.”

Interviewing the I X.0 Experts

As part of our research for Rethink, Reinvent, Realize, we spoke to three professors about digital innovation. They discussed how to drive growth through digital innovation, the impact digital technologies have on performance and organization, and digital innovation and technologies in China.

“The recent boom in technologies creates not only more successful PoCs, but also PoCs that can scale better and faster.”

“New work, delivery and business models require a new mix of skills, culture and governance that will deeply change existing organizations”.

Four ways to scale innovation like a Champion

What sets Champions apart? To maximize their scaling efforts, they’ve developed a muscle memory reflected and supported by their structure and organization.

Action #1: Define the value that will guide innovation efforts

Champions know that if their goal is not clearly defined, they are more likely to try to scale digital pilots that don’t have the organizational backbone to succeed. They assess the opportunities before them, and, at the senior-most levels, narrow in on the market problems they want to pursue. Then they direct their innovation efforts to secure expected returns.

Too often, there is a divide between what a company is trying to scale for customers and the technologies supporting the efforts. This gap can cause delays or unexpected bursts of internal change.

Champions across discrete and process industries blend organizational change and digital transformation initiatives, creating what we call an ambidextrous organization. Managers and employees never fall into a learning curve that is too steep. Instead, they become accustomed to the climb, and to the collaboration and flexibility it demands.

In fact, 62.2 percent of Champion discrete manufacturers are keen to embrace this ambidextrous approach at an enterprise level, while 52.9 percent of other discrete manufacturers are. Meanwhile, 63.5 percent of Champion process industry leaders are keen to embrace an ambidextrous approach at an enterprise level, while 54.8 percent of other process industries leaders are.

For Champions, ambidexterity enables an organization that continuously uses rapidly maturing digital technologies to grow its core and taps emerging technologies to develop and scale new endeavors.

When it’s time to scale a successful pilot that’s been developed by an autonomous entity, Champions recognize the enormity of integrating rapidly advancing technologies, along with talent and assets, back into the larger organization. They seed and grow new digital innovations organically within organizational boundaries.

They bring in new talent, but also integrate and develop existing talent as they go. They keep the new group linked to, and accountable to, the company’s profit and losses so they can preview the effect of scaling a proof of concept on the larger organization.

Action #4: Find out what enables innovation in each business function

In the end, how do you make innovation work? In short, companies can put “enablers” to work— from software applications for supporting operations to platforms for capturing and analyzing data. We found some from the second group (Contenders) —and even the third (Cadets)—select the same types of enablers as their Champion peers to facilitate innovation. However, Champions alone are masters at matching the support to the function that needs it most and will use it best.

For example, Champions have redefined their ecosystem partnerships (by adding new partners or rewiring existing relationships) to ensure that they have access to the digital talent they need from product design to scaling. Many Chinese organizations are adept this kind of “iterative innovation,” Zhu Hengyuan, Associate Professor and Vice Chair at Department of Innovation, Entrepreneurship and Strategy, School of Economics & Management, Tsinghua University, tells us.

Champions have redefined their ecosystem partnerships to ensure that they have access to the digital talent they need from product design to scaling.

“To begin with, they introduce a minimum viable product or service into smaller markets,” Zhu says. “They gather feedback from customers and partners in the innovation value chain. Based on this feedback they initiate the next round of product innovation—many times with stakeholders in the ecosystem. In this way, they evolve the product or service very quickly and sustainably.” Companies in China keep a sharp eye on the context in which their products and services are to be sold, Zhu says.

“They focus on innovating at a speed that can help them roll out products and services relevant to that context,” Zhu says, whether it’s internal to the company, such as the manufacturing context or supply chain context, or external, such as the emergence of new markets.

Haier calls its operating model “rendanheyi”—ren, in Chinese, refers to the employees, dan means user value, and heyi indicates unity and an awareness of the whole system.

Become a Champion

In the era of tech-driven innovation, many industrial companies are still grappling with transitioning to digital. To survive and thrive, they must catch up—quickly. They’ll need the right tools and teams to get up to speed at all levels throughout their organizations, from the top down.

The good news? While most of the Champions in our research made decisions years ago that positioned them where they are today, other companies can get on track. They can immediately identify and articulate the value spaces they want to capture, instead of launching shotgun-style innovation or scaling efforts.

And senior managers can identify a team, under the leadership of a C-suite executive, to assess how well the company is equipped with appropriate platforms, technologies, skills and ecosystem partners to support scaling successful pilots. Like the global sportswear manufacturer that couldn’t ramp up production fast enough, companies can’t afford to wait to bridge the digital gaps before innovating at scale. They must unify around testing and scaling across the board. To succeed, they’ll have to be as innovative internally as they aspire to be for their customers.

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